FOMC Action 'Should Help'

By John S. McClenahen The Federal Open Market Committee's (FOMC) decision June 25 to lower to 1% its target for the influential federal funds rate "should help to boost confidence and ensure a robust second half in 2003," says Thomas J. Duesterberg, president and CEO of the Manufacturers Alliance/MAPI, an Arlington, Va.-based public policy and business research group. The FOMC, in announcing the quarter-percentage-point reduction from 1.25%, was less sanguine, however. "The economy . . . has yet to exhibit sustainable growth," the 12-person panel said. And the group clearly remains on guard against widespread deflation. "The probability, though minor, of an unwelcome substantial fall in inflation exceeds that of a pickup in inflation from its already low level," the FOMC stated. San Francisco Federal Reserve Bank President Robert T. Parry, who favored a 50-basis-point reduction in the federal funds target, voted against the FOMC's 25-basis-point cut. In addition to the FOMC's lowering of the federal funds rate, the interest rate that banks charge each other for overnight loans, the Federal Reserve's Board of Governors in a related action on June 25 approved a 25-basis-point cut in the discount rate to 2%. The discount rate is the interest rate that Federal Reserve banks charge on loans to commercial banks.

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